Borrowing until it all blows up

Wednesday, October 10, 2012

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The U.S. borrows a lot of money. I thought I would go to the U.S. Treasury’s own website and see who’s loaning us all the money. I learned that even the Treasury isn’t sure. The most recent data is March of 2012, and the data is “estimated” per the Treasury.

According to the U.S. Treasury, from March of 2011 to March of 2012, the U.S. borrowed $1,312 billion ($1.3 trillion).

The primary creditors were: 1) foreign investors at $654 billion, 2) the Federal Reserve and intergovernmental at $438 billion, and 3) mutual funds at $213 billion. These three creditors account for 99 percent of the total amount loaned so I’ll stop there.

Meanwhile, the U.S. must borrow $1.3 trillion every year just to maintain sluggish economic growth. If any of these creditors decides to slowdown their Treasury purchases, the U.S. would be in big trouble.

Foreign investors must continue to have a voracious appetite for U.S. debt, and the Federal Reserve must continue its quantitative easing (QE) programs in perpetuity.

Quantitative easing is where the Federal Reserve turns debt into currency (monetization). The currency (money) is “loaned” to the government and redistributed to people, from the rich to the poor, who the politicians owe money to for their vote.

Certainly, if the Federal Reserve decided not to do more quantitative easing, one of the biggest U.S. creditors would cease to exist, and the government would not be able to continue to borrow over a trillion dollars a year and the economy would implode.

That would cause interest rates to rise dramatically because investors would lose confidence in the ability of the U.S. to pay back the loans (this is what’s happening in some countries in Europe).

It’s a no-brainer, the Federal Reserve must endlessly continue its quantitative easing programs, which is why on Sept. 13, the Federal Reserve announced another QE program.

And this time it didn’t set a time frame or total dollar amount, but simply said they would buy mortgage backed securities until they get unemployment where they want it. The Fed is also continuing its “Operation Twist,” which is selling short-term treasuries and buying long-term treasuries.

In conclusion, the Fed must buy debt via quantitative easing forever. Unfortunately, that only buys the U.S. some time. Moreover, it guarantees that the politicians will not change their ways, which is to borrow until it all blows up.